How to Get a Loan with Bad Credit
There are a ton of reasons why you might need a personal loan. Whether you’re using it to help pay off credit card debt or cover an unplanned expense, you might need a helping hand, financially speaking. However, if your credit isn’t in such good shape, you could have doubts about your personal loan eligibility. The perfect lender doesn’t seem to exist when your credit score is under 600.
The good news is that you can get a loan with bad credit. There’s no catch here, but there is going to be some work involved. Because your credit score isn’t great, the process won’t be as easy as walking into the closest bank and signing at the X. You’ll need to do some research and choose where you apply wisely. If you’re ready to learn how to get a loan with bad credit, we’ve got you covered. Follow these steps for getting a loan with less-than-perfect credit.
1. Gather Your Personal Information
Before you dive headfirst into personal loan applications and possible rejections, you need to have an idea of where you stand from the perspective of your potential lender.
Review Your Credit Score and Your Credit Report
Understanding your credit score and report can show you what your lender will see when they review the same files, both good and bad. To see where your credit currently stands, check your credit scores for free on Credit.com. Checking your credit score won’t affect your credit because it’s considered a soft inquiry or a soft pull, so it isn’t strong enough to damage what you already have.
You don’t need an 850 credit score to get a loan, but your score will impact the terms and conditions you qualify for, such as loan amounts and interest rates. For example, bad credit loans will likely come with higher interest rates and may be issued for lower amounts.
What’s Considered Bad Credit?
Credit scores can range depending on the model you’re looking at. On average, creditors consider a good credit score somewhere between 700 and 850. A fair score falls between 620 and 679, and low-to-poor credit scores are typically anything under 580.
2. Improve Your Credit Score
If you see that your credit score is looking lackluster, you may decide to improve it before applying for a loan. Some of the best ways to improve a bad credit score include paying down debts, reviewing your credit reports for errors, disputing any errors you find and limiting the number of hard credit inquiries on your credit history until your score rebounds.
Each loan application you submit triggers an inquiry into your credit, and racking up a series of hard inquiries lowers your score. When you decide to start applying, do your research and don’t apply for every loan you come across.
You also want to take a good look at your credit report. Regularly checking and monitoring your credit report from the credit bureaus is the best way to track changes or catch instances of suspicious activity in your credit history. If you see something wrong, report and dispute it quickly.
Checking your credit reports also gives you a good indication of where you would stand with a creditor and may offer insight on what you need to do to begin repairing and rebuilding your credit score before you apply for any type of personal loan.
3. Talk with Your Bank or Credit Union
After reviewing your credit score and report, research the minimum credit score requirements that lenders look for. A good place to start is with the bank or credit union you currently use, as they already have an understanding of your financial profile.
Credit unions may have more flexible lending standards than banks and may be willing to offer you a small personal loan. If you have been at the same bank for years, consider asking the bank’s loan department how to get a loan. You may also want to inquire if your credit score would qualify you for a personal loan.
4. Prove You Can Pay the Loan Back
Lenders want the assurance that you can repay the amount extended in full, including any interest accrued. Thus, the amount they extend to you often depends on your ability to repay them.
Offering proof of income or having a cosigner can soothe lender fears and make them more apt to accept your application. A cosigner is a person that is guaranteeing the debt will be paid back. If the borrower fails to make the payments, then the creditor turns to the cosigner to collect the money owed on the account. Cosigners should have a good credit score and history, and if you need to have a cosigner to get approved, they may need to provide the creditor with proof of income as well.
5. Shop Around for Lenders and Consider Loan Types
It’s a good idea to only apply for loans from a lender you trust and that has lending standards you feel confident you can meet. Remember, loans for people with bad credit might have higher interest rates or be capped at a lower amount, because lenders are more cautious with these loans. But that doesn’t mean you need to do business with a less-reputable lender.
Types of Loans and Other Factors to Consider
Personal loans are loans given by a bank or other financial institution that are usually paid back in monthly installments. These loans can either be secured or unsecured.
Secured personal loans
Secured personal loans are some of the most common types of loans and are generally used for a car or mortgage. When you borrow money via a secured personal loan, you secure the amount borrowed with one or more of your assets. Your asset then becomes collateral for the loan if you are unable to pay as agreed.
Some people avoid these loans because the creditor or lender can take whatever you have secured the loan with as their own if you fail to make payments.
Unsecured personal loans
Unsecured personal loans aren’t backed by any form of collateral or security. That creates a greater risk on the part of the lender, which means they may be less likely to approve this type of loan for those with poor credit.
Payday loans offer a lower amount of money at an even higher interest rate than other personal loans. These short-term loans are to be paid back when the borrower receives their next paycheck and have an additional cost of anywhere between 10 and 30 dollars for every $100 you borrow. Usually, these payday loans have a cap of about $500.
Peer-to-peer lending is another method of debt financing that doesn’t have a financial institution as the middleman. Peer-to-peer loans are sometimes known as a form of crowdfunding because money is raised by several people who offer unsecured funds to underserved populations.
Can you get a personal loan with a credit score of 550?
The loan may have a high APR, and large amounts are not typically extended to people with poor credit. However, it’s possible to get a personal loan with a score under 550. There are a couple of loan companies that offer the best options for people with bad credit.
Which loan company is best for bad credit?
Avant and LendingClub may be right for debtors looking for a loan with bad credit. Avant’s low-end APR is higher than LendingClub’s, but its installment loans are a good option for those with scores below 599. LendingClub is, in fact, a peer-to-peer lending company, which is a popular option for debtors with low FICO or credit scores.
6. Beware of Scams
There are plenty of online lenders promising loans with no credit check to people who have damaged or bad credit. While this option might sound ideal, be cautious. These websites may be nothing more than advance fee loan scams. According to the Federal Trade Commission, a lender not seeming interested in your credit history is a big red flag and could indicate a fraudulent website.
When you see these sites, consider contacting your state’s Department of Banking or Department of Financial Regulation to see if a lender is registered to do business within the state. The Better Business Bureau can also tell you if any customers with bad credit have filed complaints against specific lenders.
One of the biggest consequences of having bad credit is being more susceptible to scams and other fraudulent behavior. Just remember, every legitimate lender will want some proof telling them that you will be able to pay back the loan.
Another red flag is if a lender asks for advance payment before you’re given the loan. Be careful not to provide any sensitive information, like social security numbers or bank account information, without first obtaining legal documentation of the loan.
The Bottom Line
Do your research before applying for any kind of personal loan when you are faced with bad credit. While a personal loan can help you get your finances under control, it’s important to note that a loan may not be the answer to all your financial problems. By improving your score and setting long-term financial goals, you can achieve future financial health and freedom.